The Law of Perceived Value

There is always a fine line around finding the right price to charge for your product as so many variables come to mind. There is, however, one simple law to keep in mind in business when choosing the price that’s right for you or your audience. That law is what we refer to as the Law of Perceived Value. The positioning of your product matters just as much as the price point you choose. Here is how to apply the law of value to what you do everyday.

How to Apply The Law of Value to Your Business?

While price points can be tested in order to establish what the best selling opportunities are for your market, there is no doubt that positioning why the price point is right is what drives the sale. The same can be applied to you as an entrepreneur everyday and how you position yourself to succeed.

Here is a an example of how our human minds work and why it is important that we master the understanding of the law of value and learn to apply it to all we do.

Imagine you are about to go buy a car or something else that you want, like a suit or a dress perhaps. If the item is listed at $8,000 and you are offered it at $8,000, then perhaps you’ll want it bad enough but won’t have a sense of urgency to buy it. If you do buy it, it is also more likely that you will feel buyer’s remorse and question your decision after the purchase.

On the other hand, if the same product was presented for $16,000 and was offered one day only for $8,000, then your immediate reaction is to purchase it, and your mind will not feel buyer’s remorse due to the extreme value you received, and your belief that you stretched your purchasing power very far. The outcome is the same, you receive the same item and spend the same money but you feel entirely different.

This is the same reason why sales work really well at retail stores with large banners claiming 50% off. The idea that you are getting more value is what drives you to feel good and make a purchasing decision without questioning the price.

Value Positions Pricing, Not The Other Way Around

When thinking of your own business or yourself, do not think of the price you will charge for your product, service, or even yourself but rather think of how much value it will provide, and then provide all that value at half of what someone is willing to pay for it. The important part is once again how much you focus on describing the value you are providing rather than explaining why your price is low or high.

Lets assume you are selling a service like creating an app. You look at competitors and the range can be difficult to interpret. Some charge $500, other charge $25,000 but yet both provide the same service. The real question is does the $500 package sell enough to compete with the $25,000 package service. You would have to sell 50 clients vs sell only 1. Which is likely to sell more, and are they really selling any apps at the high rate of $25,000?

Here are two entirely different ways to position to same product and create the perception that the cost is warranted.

No value, only price – Example 1: I will code you an app from A to Z for $500.

Great value – Example 2: I will design, code, test and setup your award-winning app, capable of getting millions of downloads for $50,000, but today only will do so for $25,000.

The idea is that the consumer gets the same product on both ends, but he believes he is getting greater value by understanding the components better. In example 1, the person being pitched the product is obviously not a coder and doesn’t understand A to Z or what is included and therefore cannot place a value on that. Spending $500 could be good or bad, but has no real measure for the person being pitched, as it’s not relative.

On the other hand, example 2 describes clearly the rigorous process and states an additional obvious benefit “capable of getting millions of downloads” for the consumer. While both apps are capable of that, one provides this additional re-enforcement and sub consciously allows the consumer to assume this $25,000 app that is 50% off will create a million dollar empire. This may not be the case and is not said in a deceptive way but rather presented in a way that allows the consumer to assume.

This same concept can also be applied to you as an individual. Think about your ability to sell yourself at an interview. If you are showcasing your value to be more than the salary represents but are accepting the job at a lower amount than you are worth, the interviewer believes he is getting a steal adding you to his team. This is often the reason why people will hire people who were previously at higher level positions and are willing to step down thus are getting tremendous value at a fraction of the cost.

The concept here is simply create an environment where your value or your product’s is perceived to be at least 3 times what you charge. Once you do, you will find that your price is only 10% of the equation and the presentation is what gets you that 90% you need to succeed. For those of you still confused, make sure to check out Third Circle Theory about the ability to control circumstance to take your understanding of the law of value further.